Greetings and Happy New Year
A pretty rough start to the year for global shares primarily driven by concerns about growth in China and a glut in the Oil Market with prices at a 15 year low . This may be a rerun of a similar event in China 4 months ago which again led to a sharp decline followed by a steady recovery in markets and shows the power of sentiment over investment decisions . The actual annualised GDP of 6.9% was broadly anticipated and shows how much China is carrying the rest of the world .By contrast we may well struggle to reach 3.0% annually . China continues to adjust from an export driven low wage economy into a more domestically focused market which over the long term will drive a much more stable and dependable economic result so this is not a bad outcome . There is little point in overstating growth achievements indefinitely through building excess capacity beyond community requirements leading to a bubble later so we will need to live with this regional volatility and its overflow globally for the foreseeable future.
The actual technical trigger to the sharp decline appeared to be a decline in the value of the Yuan and the new trading rules on the mainland introducing trading halts at 5% for 15 minutes and then 7% for the day . This is a very low threshold compared to the 20% both at home and in the US and led to short term panic as investors tried to execute their trades before markets prematurely closed after a mere 25 minutes .China inter-day market had swung 7% quite regularly in the past and as such the market reaction was both predictable and entirely logical , With no capital gains tax in China there is very little reason to hang on to a share that could be bought back at a later stage which again encourages short term trading rather than our traditional buy and hold strategy . Not surprisingly the trading halts were cancelled by the authorities which allowed a much more orderly execution of transactions over a full 8 hours trading . Ultimately these are teething problems for an economy used to central control with the irristable force of a centrally planned economy fighting the immovable object of a global capitalist financial system without international boundaries .
The other major event in the last few weeks has been the rapid decline in oil prices to 15 year lows . This has been a function of overcapacity from OPEC and the reintroduction of Iran back into the global economy who will be a major oil exporter . This has led to speculation that Saudi Arabia may list their major oil company on a global stock market in an attempt to balance their own budget while wider regional tensions continue to fester away . Over time you would expect common sense to prevail with output to be cut and prices to rise . However unless you are an oil exporter most economies and business will benefit from lower input costs which should among other things lead to cheaper petrol this is particularly good for airlines and their passengers. The graph below shows the decline in oil prices over the last few months .
Domestically our market as represented by the ASX 200 is tracking just below 5000 with a running yield above 5% much of which is franked and appears to be sustainable . We will have our half yearly company briefings in February which will give updated insights into future earnings guidance but at this stage the main impact on share prices remains in the resources sector . Interestingly as a % of our total market resources have declined from 32% in 2011 to 13% last year with the other two sectors of Industrials and Financials rebalancing up to 38% and 48% respectively . So the impact on the wider market due to commodity prices had declined significantly over the last few years which again should reduce volatility in our domestic economy in the future . Our high dividend yield relative to similar countries again should benefit income seeking global investors supplements by our lower dollar .The summary below shows our dividend yield relative to similar economies oversees.
We have had some stock specific issues domestically with Dick Smith and Laura Ashley both going into receivership and the plaintiff legal firm Slater and Gordon ironically being subject to a class action. However on balance there would appear to be some reasonable buying opportunities for our blue chip companies with sustainable dividend yields at depressed prices but we will have to remain realistic about the future growth potential of investments while wider macro issues are volatile . Historically markets do recover over the next few weeks as short selling works itself out of the system and markets reprice to fair value but again this is not a suitable time to take large bets on the market either way . Weekly economic data can make as much impact on your favourite share as anything more stock specific and caution should as always be top of mind. We do look to reduce this volatility where possible through the use of ‘Real Return Fund Managers ‘ as part of a diversified portfolio which seek to benefit investors when markets are turbulent . These funds have a fair amount of flexibility to adapt to changing conditions with a primary goal of protecting investor capital . Although not an exact science these managers have proven themselves over many years to help investors through investments that are non- correlated to equities. This coupled with high yielding infrastructure and property trusts should result in total income to clients remaining unchanged via our model portfolios .
Finally for our retired clients there has been a tightening of the Asset Test for Centrelink purposes where couples living in their own home will now only qualify for a part pension with Assets of $830k formally $1.1m . There are a number of potential strategies for clients effected which we will consider on a case by case bases . For those of you looking to make significant Superannuation Contributions this year the strong recommendation is to complete transactions prior to the May Budget where rules may change and make future contributions less attractive. There is further information on contribution rules and limits on our interactive website
www.virtueandpartners.com.au .
While this has been a difficult start to the year the wider macro themes and trends remain largely unchanged and on balance analysts are expecting a reasonable but not outstanding year underpinned by solid dividend yields , Try not to be too engaged with main stream media who seem to delight in bad news but stay silent when markets recover . If you do have concerns please ring or email me and we will work things through . We are here to help you as always based on your personal circumstances and look forward to seeing you all in due course.
Sincerely
Tony
